Random Flashcards
What is the formula for Price Elasticity of Demand?
Price Elasticity of Demand = Change in Quantity Demanded / Change in Price
This measures how much the quantity demanded of a good responds to a change in price.
What does an elasticity value of 0 indicate?
Perfectly Inelastic
This means that quantity demanded does not change regardless of price changes.
What does an elasticity value of 1 indicate?
Unit Elastic
This means that the percentage change in quantity demanded is equal to the percentage change in price.
What is the relationship between price and total revenue when demand is relatively elastic?
Inversely related
If demand is elastic, an increase in price will lead to a decrease in total revenue.
What are the three questions to determine Demand Elasticity?
- Are there substitutes available?
- Can the purchase be delayed?
- Does the price require a large percentage of income?
These questions help assess how sensitive demand is to price changes.
What does Cross-Price Elasticity of Demand (CPED) measure?
Whether products are substitutes or complements
It assesses how the quantity demanded of one product changes in response to a change in the price of another product.
What does a positive CPED value indicate?
Substitutes
This means that an increase in the price of one product leads to an increase in the quantity demanded of another.
What does Income Elasticity of Demand measure?
How consumers are constrained by budget or income
It indicates how quantity demanded changes in response to changes in consumer income.
What is the formula for Price Elasticity of Supply?
Price Elasticity of Supply = % Change in Quantity Supplied / % Change in Price
This measures how responsive the quantity supplied of a good is to a change in price.
Define Consumer Surplus.
The difference between the highest price a consumer would pay and the actual price paid
It represents the benefit to consumers from participating in the market.
Define Producer Surplus.
The difference between the lowest price a producer would accept and the actual price received
It indicates the benefit to producers from selling in the market.
What is a Price Ceiling?
Maximum legal price that can be charged for a product or service
It is intended to protect consumers from high prices.
What is a Price Floor?
Minimum legal price that can be charged for a product or service
It is intended to protect producers by ensuring prices do not fall too low.
What does the Law of Demand state?
There is a negative relationship between price and quantity demanded
As price increases, quantity demanded decreases, and vice versa.
What does the Law of Supply state?
There is a positive relationship between price and quantity supplied
As price increases, quantity supplied increases, and vice versa.
What does the acronym SPICE stand for in Demand Shifters?
- Substitute Goods
- Preference / Population
- Income
- Complementary Goods
- Expectations
These factors can shift the demand curve.
What does the acronym ROTTEN stand for in Supply Shifters?
- Resource Cost
- Other Goods’ prices
- Technology
- Taxes and subsidies
- Expectations
- Number of Sellers
These factors can shift the supply curve.
Define Marginal Utility.
The extra amount of satisfaction or utility from consuming one more unit of a good or service
It helps determine how much of a good a consumer is willing to purchase.
When is Total Utility at its highest point?
When Marginal Utility is 0
This indicates that consuming more of the good does not provide additional satisfaction.
What is the Utility Maximization rule?
A consumer maximizes utility when the marginal utility per dollar spent for all items is equal
This helps consumers allocate their budget effectively.
What are the two types of inputs in production?
- Variable Inputs
- Fixed Inputs
Variable inputs can be changed in the short run, while fixed inputs cannot.
Define Total Product (TP).
The total quantity of output produced by a certain amount of inputs
It reflects the overall production efficiency.
What is Marginal Product (MP)?
The additional output produced by one more unit of a variable input
Often refers to labor, calculated as MP = TPL.
What is Average Product (AP)?
The average quantity of output produced by one unit of a variable input
Calculated as APL = TPL.
